The Art of Withdrawing Funds in Retirement

By: Robert Jeter, CFP, CRPC

Most people will find themselves the wealthiest they have ever been when they reach retirement age. This can be a good feeling, and a scary feeling. The scary part is what comes next. You have had all of this time, weathered many storms to accumulate this mass of wealth. Now, it’s your life’s work, your life’s savings and its going to have to last for a long time. So how do we take funds out without running out of money? It requires a significant amount of planning, a diligent investment strategy and a pretty strong grip on your emotions. In this article we will explore the different facets of creating a distribution strategy and why it is a different investment experience than your working career.

When you were employed and contributing to your retirement plan, as far as investing goes you had a lot of things going for you. Time, volatility and a little thing called dollar cost averaging were most likely huge factors in the wealth you were able to accumulate today. The longer you invest in something (there are exceptions) usually the better results you will experience. The stock market has gone up over time. Volatility, while it doesn't feel great allows you to potentially buy in at cheaper prices over the course of your investment. We all love shopping during a sale, and the same applies to your investments. Dollar-cost averaging is the mechanism that allows you to buy investments periodically. Instead of investing a lump-sum, you buy in every two weeks or monthly via payroll deductions. By doing this 12 or 24 times a year you will potentially buy stocks while they have dropped in price and would lower your overall average cost of investment. This in the long-run, helps increase your overall rate of return.

Once you reach retirement, the name of the game has quite literally been spun 180 degrees. Time, volatility, and systematic sells to distribute your assets have the opposite effect that you had benefitted from over your working career. First and foremost, that finite dollar amount you begin with in retirement has to last a long-time. As such, you are still going to need to invest. Most people assume that you become a more conservative investor as you grow older. Inflation, or the growth of your expenditures ironically hits retirees much harder than your average worker. As you begin to take a series of monthly withdrawals, the market will still have its ups and downs. The monthly distributions, or dollar cost averaging now has the opposite effect. While you take this income, you will on occasion be forced to sell a portion of your investments at a loss simply due to market volatility. Selling an investment at a loss just locks in that loss, and makes the return required to re-coup that loss even higher. In a period of prolonged volatility, or large market correction this can pose serious risks for retirees in their first few years of retirement. The losses can be significant, and occur at such an in-opportune time that your portfolio may have trouble recovering.

So what can you do to help reduce these risks? Investing in retirement is truly a game of probabilities. My job as a Financial Advisor, and your job as a retiree is to do our very best to increase those probabilities of a desirable outcome. First and foremost, you need to have an idea of what you will be spending. Once you know how much you will need to take out of your portfolio, you can start to think about how that portfolio should be invested. The less you need to withdraw, the higher probability of not running out of funds. Second, have a distribution strategy. There is a large school of thought on which strategy is best, and many of them have merit in their value. Whatever you choose, I would encourage you to stick with it. Be comfortable with it, so in the midst of the next crisis or downturn you do not have to suspend your withdrawals and you are emotionally capable of riding out the storm. Third, while it took up the majority of this article it’s not all about the portfolio. There are many planning items which retiree’s forget to update or simply don’t plan for. No matter how your portfolio performs, unexpected emergencies can arise and can de-rail a retirement plan very quickly. Make sure you have examined your strategy thoroughly or teamed with a professional who has assisted you in comprehensive planning.

The art of withdrawing your assets in retirement is a summation of mathematics and planning. A truly sound retirement plan is one that understands the probabilities and risks of retirement. While there are plenty of challenges in making your nest egg last for a long-time, there are strategies to increase the probabilities of success and individuals to help you comprehensively plan for unexpected challenges in the future.

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Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC.
Cetera is under separate ownership from any other named entity.

Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested.  No system or financial planning strategy can guarantee future results.